World's central banks help lenders as EU growth stalls

(BRUSSELS) - The eurozone's runaway debt crisis is dragging
down growth, the EU warned Thursday as finance ministers headed to key
talks and central banks rode to the rescue of the cash-starved lenders.

The
European Central Bank, along with its US, Japanese, Swiss and British
counterparts, announced they would inject extra dollar liquidity into
banks facing a shortage of the US currency.

European bank shares
have plunged over the past weeks as their usual sources of dollars have
dried up on concerns they might be hit by a Greek debt default, and the
announcement sparked a strong bank and general stocks rally.

The
ECB said the central banks will "conduct three US dollar
liquidity-providing operations with a maturity of approximately three
months covering the end of the year."

Their action followed a gloomy economic report from the European Commission.

EU
Economic Affairs Commissioner Olli Rehn said the economy was set to
come to a "virtual standstill" in the second half of the year, but he
assured that Europe would avoid another recession.

"The outlook
for the European economy has deteriorated," Rehn told a news conference
releasing the interim economic report. "We are expecting a stalling of
economic growth but not a recession."

Although the growth forecast
for 2011 remained at 1.6 percent, it will slow to 0.2 percent in the
third quarter and a mere 0.1 percent in the final three months of the
year, worse than previously thought.

EU finance ministers meet in
Wroclaw, Poland, for dinner on Thursday ahead of two days of talks
centred on a new Greek rescue package that was agreed by eurozone
leaders in July but has yet to be implemented.

Highlighting deep
concerns over the crisis' global impact, US Treasury Secretary Timothy
Geithner will join his EU counterparts in Poland on Friday to deliver a
rare address by an outsider.

In Washington, IMF chief Christine
Lagarde warned that political dysfunction and indecision was fueling a
"vicious cycle" that threatened to send Europe and the United States
back to recession, threatening developing countries as well.

"If
the advanced economies succumb to recession, the emerging markets will
not escape. Nobody will. Rebalancing is in the global interest, but it
is also in the national interest," she said.

With markets
convinced that Athens was headed towards default, French President
Nicolas Sarkozy and German Chancellor Angela Merkel insisted Wednesday
that Greece belonged in the eurozone.

In a three-way call with the
French and German leaders, Greek Prime Minister George Papandreou
promised to apply overdue measures required of Greece in return for the
next slice of rescue money.

Rehn said he expected auditors from
the EU, IMF and European Central Bank to complete their review of
Greece's budget measures by the end of September, which could pave the
way for Athens to receive the next installment of a 110-billion-euro
($151 billion)bailout it was granted last year.

Without the eight billion euros in funding Athens will run out of cash next month.

A new 159-billion-euro lifeline also hangs in the balance and will be at the centre of talks in Poland.

Sarkozy
and Merkel stressed in a statement that "now more than ever it is
indispensable" to implement the measures agreed at the July 21 eurozone
summit aimed at stabilising the eurozone.

Finance ministers will
also consider a compromise deal reached with the European Parliament
aimed at toughening the EU's deficit and debt rules, long ignored by
governments.

But divisions remained between EU states over the idea of issuing unified eurozone bonds.

The
European Commission said it would soon present options for such
"eurobonds," but with German Chancellor Angela Merkel repeated her
opposition on Thursday, calling them an "absurdity."

Market
analysts argue that eurobonds could be a quick way to resolve the debt
crisis because they would level out interest rates across the single
currency area, and eliminate the possibility of markets boycotting the
debt of single countries seen at risk.

Germany enjoys the lowest
interest rates thanks to its healthy budget and economy. And its growth
prospects, according to the commission's report, improved to 2.9 percent
for 2011.

The forecast, however, worsened in Italy (from 1.0
percent in a previous forecast to 0.7 percent), France (from 1.8 percent
to 1.6 percent) and the Netherlands (from 1.9 percent to 1.7 percent),
the report showed.

"Recoveries from financial crises are often
slow and bumpy. Moreover, the EU economy is affected by a more difficult
external environment, while domestic demand remains subdued," Rehn
said.

"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."

The
European Commission said that weakening global demand and trade over
the summer, and signs that the recovery lost steam in the United States
over the summer, also contributed to Europe's economic slowdown.